Governance matters most when a business is experiencing financial stress. Taking a deep breath and revaluating governance processes before responding to a crisis reduces risk, optimises decision making and hopefully speeds the path to recovery.
There is often a reluctance to formally reconsider a company’s governance approach once a crisis has landed, driven by a mixture of panicked desire to jump to immediate action, denial and the view that “the ship has sailed” and it’s now too late for process change.
However, reviewing relevant strategic, financial and organisation risks and related governance processes should be prioritised based on the organisation having a reduced scope for financial shocks and underperformance. Example priority areas for consideration are:
- Credit and liquidity management
- Interest rate, currency and commodity hedging
- Major CAPEX authorisation
- Controls for delegated authorities and fraud prevention
When a board and executive team are planning an organisations response to financial stress, here are seven tips for ramping up financial governance:
- Revisit the risk appetite of the organisation while integrating it with the revised strategy for addressing the financial position. For instance, a strategy/risk appetite based on significant CAPEX and retail footprint expansion may no longer be appropriate.
- Establish a “turnaround” committee with authority for overseeing operational changes and dealing with financial management issues such as any refinancing or capital raising. This creates agility and ideally it would include both senior members of the executive and board.
- Develop enhanced/special purpose reporting focussing on relevant issues such as cash flow, bank facilities, debt and equity raising, unprofitable divisions, shutdowns, exits, etc.
- Review financial risk policies, frameworks, and registers. Perhaps there are litigation risk issues that need to be escalated or project risks with a significant construction development that need to be reconsidered. A reasonable assumption is that when it rains it pours so best to get ahead of the curve.
- Check-in on corporate culture. Poor culture can override any governance process with warning signs such as insularity and complacency. Meet with staff, conduct formal or informal surveys and encourage a better corporate culture.
- Only use external advisers to supplement the processes of the organisation ie responsibility and solutions are only found from within the company.
- Saying all of that …….. practicality is critical when under financial stress and all governance needs to be managed while balancing the competing priorities of:
- Agility v process
- Executive responsibility v board oversight
In an ideal world appropriate financial governance will already be in place to manage any issue, the reality is that it is difficult to anticipate the effects of financial stress and some recalibration of governance is always desirable.